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Rebuilding Paradise

Nov 11, 2019

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Marketplace

The downsides of low interest rates

Mitchell Hartman Aug 21, 2018
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President Donald Trump has long favored low interest rates, which are typically a boon for real estate developers. And he has criticized the Federal Reserve and the chairman he appointed, Jerome Powell, for pursuing a policy of gradual rate hikes initiated under former Fed Chair Janet Yellen. But maintaining a loose monetary policy could be risky now that the economy has been in recovery mode for nearly a decade, consumer sentiment and spending are strong, and unemployment is near record lows. Inflation has risen moderately and could spike higher as employers face labor shortages and raise prices to fund wage hikes for their employees. Cheap money can lead to risky financial behavior, as investors seek higher returns and increase their tolerance for risk and consumers borrow at unsustainable levels — all of which can lead to market distortions and speculative asset bubbles. Savers, especially retirees and others on a fixed income, do poorly in a low interest rate environment, because returns remain low. And unless the Federal Reserve raises interest rates soon, it won’t be in a position to lower rates again to stimulate the economy when the next recession rolls around.

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